The reasoning here is pretty simple. When the economy is shrinking, you don’t raise taxes or do anything else (such as cutting spending) aimed at shrinking the federal deficit. Instead, you do whatever it takes to get the economy growing again. As Obama adviser Austan Goolsbee put it in today’s NYT:

Unfortunately, the next president’s No. 1 priority is going to be preventing the biggest financial crisis in possibly the last century from turning into the next Great Depression. That has to be No. 1. Nobody ever wanted that to be the priority. But that’s clearly where we are.

So that takes care of 2009. Then comes 2010. The Bush tax cuts expire at the end of that year. Obama’s plan all along has been to make the cuts for low- and middle-income taxpayers permanent while letting the top two tax brackets revert to their pre-Bush levels of 36% and 39.6% (from 33% and 35%), while raising the tax rate on capital gains and dividend income back to the pre-Bush rate of 20% for those with incomes above $250,000 a year. His adviser Goolsbee, a University of Chicago economist, has spent a lot of time studying the response of individuals and corporations to changes in tax rates. His big conclusion (pdf!): At current rates, raising taxes on high earners would have little negative economic impact and would bring in more money for the government. In other words, we’re nowhere near the point on the Laffer Curve where cutting tax rates would produce more government revenue.

But it wouldn’t produce that much more revenue–the Urban-Brookings Tax Policy Center puts the figure at about $72 billion a year. With massive, possibly trillion-dollar deficits likely this year and next, it’s going to take much more than to begin to return the country to a sustainable fiscal trajectory.

This where things will begin to get interesting. Not in 2009. Maybe not even in 2010. But after that something has to give. Fiscal conservatives are likely to push–as the Tax Policy Center’s Len Burman already did Wednesday–for letting more of the Bush tax cuts (you know, those on the middle class) expire. With Obama already having said that we need to stop relying on consumer spending as the main engine of economic growth, also I wouldn’t be at all surprised if we start to hear serious talk of instituting some kind of consumption tax–either an across-the-board one like a VAT or something more targeted to energy and the environment. (I should add that I think this would probably be a good idea; but it is a tax increase.) And of course there will be lots of talk about what to do on the spending side, but don’t count on a whole lot of movement in the direction of cutbacks.

A big question is whether pushing through tax hikes to shrink the deficit would amount to political suicide. It has seemed to be for the past quarter century–probably costing George H.W. Bush the presidency in 1992 and Bill Clinton a friendly Congress in 1994. I’ve always thought this was terribly unfair: Both Bush and Clinton were simply reacting to fiscal problems created during the Reagan years. Just as any tax increases that Obama implements a couple of years down the road would be necessitated in part by his predecessor’s unwillingness to take fiscal policy seriously. Will voters get that? We’ll see.